Regulated firms and their compliance teams are well aware of the risks and potential outcomes should the Financial Conduct Authority (FCA) open a formal investigation. Compliance teams should ensure, in advance of the FCA knocking on the firm’s door, that they understand the investigation process and have systems that allow them to respond effectively to the investigators.
Step 1 – The Section 170 notice
Generally, once the firm is the subject of a formal FCA investigation, it will receive a notice, under s170 of the Financial Services and Markets Act 2000 (FSMA), of the appointment of investigators and the reason for the investigation.
- Carefully review the notice: This may sound obvious, but the firm needs to obtain a clear understanding of what is under investigation, in particular: (1) the relevant time period which is the subject of the investigation; and (2) the specific breaches or offences that are under investigation.
- Internal communication: Aside from the compliance team, the firm should consider who needs to be made aware of the notice. This includes the board, legal advisors and relevant employees. Preservation of documents: Ensure that steps are taken to keep relevant documentation preserved. Identify which employees are in possession of relevant documents and communicate with them.
Step 2 – Scoping discussions
Following the issue of the notice, the FCA will often suggest that an initial “scoping meeting” takes place between the investigators and the firm. These scoping discussions are crucial: they provide an early opportunity to obtain more information as to the basis, scope and timeline of the investigation.
- Attendees: Consider who within the compliance team will need to be the main point of contact with the FCA throughout the investigation, and ensure that this person is in attendance.
- Adequate preparation: The scoping meeting exists to benefit the firm. To avoid the meeting simply becoming a box-ticking exercise on the part of the investigators, the firm should prepare questions and issues that need clarity, particularly if the notice of appointment was ambiguous or “light” on detail.
- Who and what?: Ascertain which personnel within the firm the FCA is interested in and the potential requests for information. This will enable the firm to engage with employees at the earliest possible stage.
- Legal representation: At this stage, legal representation needs to be considered — is it suitable to allow relevant employees to be advised by the firm’s legal counsel (in-house or external) or should separate legal representation be obtained for the employees? This will depend on the nature of the investigation and whether any conflicts arise.
Step 3 – Requests for information
The FCA has powers to request information and documents from the firm which are relevant to the investigation.
- Time limit: Consider the time limit for the provision of the information. If it is unrealistic, seek to negotiate an extension at the outset.
- Early engagement: If a request is not practical or is disproportionate, engage with the FCA early and explain why.
- Management of requests: There will likely be more than one request for information and the requests should be managed by an allocated person. This person should be keeping track of the requests, the deadlines and the electronic searches undertaken for each request.
- Privilege: Determine whether legal professional privilege can be asserted over any documents, or parts of documents.
Step 4 – Interviews
The FCA will generally seek to conduct interviews with relevant individuals following the gathering of information.
- Attendance of legal advisors: Ensure the attendance of in-house or external legal counsel (refer to tip ” Who and what” above regarding separate representation). Communication re: logistics: Obtain logistical information from the FCA, such as predicted length of the interview, interview attendees and whether the interview will be recorded. Similarly, the firm should tell the FCA about the legal representative who will be accompanying the interviewee.
- Obtain advance information (if possible!): The FCA generally does not disclose the questions it intends to ask the interviewee, however, the firm could seek an indication on the broad topics the regulator intends to cover.
- Following the interview: The interviews will generally be recorded — the firm should request the recordings and transcripts following the interviews and check the transcripts to ensure they are accurate.
Step 5 – Preliminary findings letter and report
Following completion of the investigation stage, the FCA will normally provide a preliminary findings letter with a preliminary investigation report attached. The letter and report will set out the facts which the investigators consider relevant and will invite the firm to confirm that those facts are accurate and to provide any further comment.
- Time limit: As the FCA is not required to consider a response received outside the stipulated time period, the firm should ensure the time limit is reasonable (it is normally 28 days) and allows it to respond properly. If the time limit cannot be met, the firm should request an extension at the outset, explaining why it is required.
- Settlement discussions: The FCA offers discounts for earlier settlement. Settlement should therefore be considered following receipt of the letter. Whether it is appropriate to commence settlement discussions at this stage (rather than waiting for the decision of the Regulatory Decisions Committee (RDC) to proceed) will depend on the strength of the preliminary findings letter and report, and what can be usefully said in response. The firm is expected to initiate settlement discussions.
Step 6 – Response
Following the firm’s response, it is possible that the FCA may decide not to take any further action. It is an important opportunity to influence the FCA’s thinking on whether disciplinary proceedings are justified. Accordingly, submitting a clear and persuasive response may be crucial. On the other hand, if the FCA does proceed, the response will be seen and relied upon by the RDC.
- Focus on the facts: Clarify and correct any of the facts outlined in the report. It is vital that the response is completely accurate as to the facts as it may be difficult to introduce or alter the facts at a later stage.
- Deal with the issues: Deal with each of the alleged breaches separately, providing the firm’s position on each point. Note that any admissions in the response can be relied upon by the FCA if the matter proceeds.
Step 7 – Referral to the RDC
Following the response, if the FCA decides to proceed, the case will be referred to the RDC with a recommendation that action be commenced.
- Open and constant dialogue: Compliance teams need to keep in mind that full cooperation with the FCA is expected and is required by Principle 11 of the Principles for Businesses. The extent of cooperation will be taken into account by the FCA as a mitigating factor for any breach. Accordingly, open and constant dialogue with the regulators throughout the process is essential to ensure the firm is in the best position at the end of the investigation.
This article was originally published by ThomsonReuters in February 2020.